Road to Ruin? Horizontal Equalisation of Road Grant Allocations in Eastern Mainland Australian States

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INTRODUCTION

Australia has a federal system of government comprised of a national government, eight state and territory governments, and almost six hundred local government entities spread over seven local government systems (McLean 2004). Local government is not recognised in the Australian Constitution and thus exists as a creature of the relevant state government 'exercising its [limited] powers by delegation from the State and under the State's supervision and authority' (Twomey 2012, 144). The origins of local government pre-date the establishment of the Australian federation in 1901 with its genesis in the form of the 1830's Road Boards and Roads Trusts. This function, together with waste collection and disposal, still form a significant proportion of the overall functions of Australian local government (Drew and Dollery 2014a).

Scholars of federalism have attributed numerous benefits to the federalist model compared with unitary systems (see, for example, Oates 1972). The principal argument resides in 'the hope that state and local governments, being closer to the people, will be more responsive to the particular preferences of their constituencies and will be able to find new and better ways to provide these services' (Oates 1999, 1120). By better aligning public goods and services to local preferences a greater level of welfare can be attained in the absence of economies of scale or interjurisdictional externalities (Oates 1999). More recently arguments in support of federalism have emphasised the innovative capacity of 'democratic laboratories' (Bednar 2011) and 'yardstick competition' (Boadway and Tremblay 2012). While efficiency arguments based on Tiebout mobility have been advanced in some decentralised systems of government, these arguments have limited relevance in the Australian local government milieu, given the restricted range of services provided by municipalities and the resultant comparatively low property taxes (Drew and Dollery 2014a; Boadway and Tremblay 2012).

Almost all multi-tier systems of government exhibit a degree of vertical fiscal imbalance as a consequence of the fact that central governments typically collect most tax revenue. Since national governments usually possess greater revenue relative to expenditure needs than lower tiers of government, including local government, there is a need for fiscal transfers between the different tiers of government. In Australian federalism, vertical fiscal imbalance has been exacerbated by the fact that the federal government has been the sole collector of income tax since 1942. By contrast, local government is restricted to a land tax imposed on properties within its jurisdiction, as well as a range of fees and charges, but even property taxes have been capped in New South Wales (NSW) (Dollery, Crase and Johnson 2006).

Equalisation grants in Australian federalism have been implemented 'as a necessary counterpart to decentralisation, offsetting its tendency to create disparities among regions in the ability to provide public goods or services' (Boadway 2004, 212). The aspiration underlying fiscal equalisation grants in Australian federalism resides in the claim that 'a federation with equalised ... fiscal capacities is one that, in principle, replicates the equity of a unitary system while at the same time providing the benefits of decentralisation' (Petchey and Levtchenkova 2004, 192). Such a system of horizontal fiscal equalisation (HFE) transfers aims to provide a minimum level of public goods and services to all citizens irrespective of their spatial domicile (Mieszkowski and Musgrave 1999).

This paper examines the operation of road HFE grants through the state Local Government Grants Commissions (LGGC) in the context of the three most populous Australian states. Roads have been selected because (a) in a large commodity based economy, like Australia, road infrastructure plays a pivotal role in economic growth; (b) local government roads comprise about 80% of the total Australian road network (Chakrabarti, Kodikara, Pardo 2002); (c) road maintenance represents a quarter of total municipal expenditure and has been cited as a key factor impinging upon local government financial sustainability (PriceWaterhouseCoopers (PWC) 2006); (d) road grant funding accounts for approximately one third of total federal transfers to local government; and (e) the burden of local road investment and renewal falls especially heavily on rural and remote councils, which typically possess very low population densities and large spatial areas. …